JB Hi-Fi tips FY profit fall

Shares in electronics retailer JB Hi-Fi have slumped to a three-year low, after the chain cut its full-year profit outlook because rampant discounting has damaged margins.

Retailers have been suffering for the past year as frugal consumers cut back on spending and wait for sales amid economic uncertainty and still relatively high official interest rates.

JB Hi-Fi today reaffirmed its sales forecast, but warned a hit to margins would reduce full-year net profit to between $100 million and $105 million. That was below analysts' forecasts of $119 million for fiscal 2012.

JB Hi-Fi shares were down as much as 75 cents, or 7 per cent, to $9.96 in morning trade, their lowest level since March 2009.

Sales improved progressively over the three months to March 31, and the company still expects to make $1.3 billion in sales for the full financial year.

But market-wide discounting caused JB Hi-Fi's gross margin to fall by two percentage points in the three months to March.

"We anticipate that this level of discounting will continue over the next quarter, but we do not believe that this is a long-term structural change," chief executive Terry Smart said in a statement.

"While the impact on our earnings is clear, as a market leader with an everyday low price proposition, JB Hi-Fi will react aggressively to maintain our market leadership."

JB Hi-Fi said its margins were also affected by the closing down sales of competitors' stores including Dick Smith Electronics, owned by Woolworths.

More headwinds

City Index chief market analyst Peter Esho said that the electronics retailer faced ongoing headwinds in a market in which consumers demanded lower prices.

"Heavy discounting is a new reality and JB Hi-Fi is becoming a victim of its own success, when in prior years it was able to grow earnings and insulate its margins despite a very tough consumer electronics market," he said.

"JB Hi-Fi's shares have been weak over the past few months but yesterday's closing price still represents a market capitalisation of just over $1 billion," he said.

"Add to that the debt that was taken on to buy shares at much higher levels, the price to earnings ratio is not demanding but the business is probably close to maturity now so there is no compelling reason to buy the stock either."

Comparable store sales this month are expected to be lower, and the company expects comparable store sales to be down by as much as 2.5 per cent in the final three months of the financial year.